The J. M. Smucker Company Announces Record First Quarter Results

Sales increased 58 percent with the addition of Folgers and on strong volume gains across the U.S. retail businesses. Operating margins expanded significantly, and as a result, net income growth substantially exceeded net sales growth.

24 Aug 2009 --- The J. M. Smucker Company announced results for the first quarter ended July 31, 2009 of its 2010 fiscal year. Results for the quarter ended July 31, 2009, include the operations of The Folgers Coffee Company.

* Sales increased 58 percent with the addition of Folgers and on strong volume gains across the U.S. retail businesses. Operating margins expanded significantly, and as a result, net income growth substantially exceeded net sales growth.
* Merger and integration costs of $0.09 per diluted share are included in the first quarter of 2010 while restructuring and merger and integration costs of $0.05 per diluted share are included in the first quarter of 2009. Excluding these items, the Company's non-GAAP income per diluted share was $0.92 and $0.82 for the first quarter of 2010 and 2009, respectively, an increase of 12 percent.
* Amortization expense of $0.10 and $0.02 per diluted share is included in the first quarter of 2010 and 2009, respectively.

"We are off to a strong start this year, with good results in our core Smucker business and the addition of Folgers, which continues its strong performance," commented Richard Smucker, Executive Chairman and Co-Chief Executive Officer. "As we enter the Fall Bake and Holiday period, we will have the first opportunity to offer multi-branding promotional events including Folgers. We support our brands with investments in product innovation and marketing, and believe we are well-positioned for continued long-term profitable growth."

"More than ever, we believe that owning number one brands provides a competitive advantage, and our recent results continue to demonstrate the success of this strategy," added Tim Smucker, Chairman of the Board and Co-Chief Executive Officer. "Our strong and growing portfolio of number one brands meets the needs of today's consumers, particularly as the 'eat at home' trend continues. We play an important role in these family moments, by offering trusted products and simple pleasures."

Net Sales

Net sales were up 58 percent in the first quarter of 2010 compared to 2009, primarily due to the addition of Folgers. Excluding Folgers, net volume increased 2 percent, led by Pillsbury flour, baking mixes, and frostings, Crisco oils, Jif peanut butter, and Smucker's fruit spreads which were partially offset by decreases in the special markets segment. Volume gains were more than offset by price declines taken in calendar 2009, primarily in the U.S. retail oils and baking segment, and higher promotional spending in certain categories. Excluding acquisitions and foreign exchange, net sales were down 1 percent in the first quarter of 2010, compared to 2009.

Margins

Overall, gross profit increased $198.3 million in the first quarter of 2010 compared to 2009 with Folgers contributing over 90 percent of the increase. As a result, gross margin improved from 31.3 percent in the first quarter of 2009, to 38.6 percent in 2010. Folgers' gross margin was favorably impacted by its strong sales volume, favorable green coffee market conditions, and product sales mix. Gross profit on the Company's base business improved by approximately 4 percent, and increased 1.7 percent of net sales primarily attributable to lower costs.

Selling, distribution, and administrative ("SD&A") expenses increased 54 percent for the first quarter of 2010, compared to 2009, with the addition of Folgers accounting for the majority of the increase. As a percentage of net sales, SD&A decreased from 19.7 percent in the first quarter of 2009 to 19.1 percent in 2010. Consistent with the Company's strategy of long-term investment in its brands, marketing expense increased during the first quarter of 2010, compared to 2009, in support of the Company's brand equity initiatives, including new advertising. However, total marketing and selling expenses decreased as a percent of net sales, along with corporate administrative expenses, reflecting efficiencies realized upon integration of Folgers.

Amortization expense, a noncash item, increased $16.9 million to 1.7 percent of net sales in the first quarter of 2010, compared to 0.2 percent in the same period in 2009, reflecting the addition of intangible assets associated with the Folgers transaction.

Operating income more than doubled compared to the first quarter of 2009, and improved from 10.8 percent to 16.0 percent of net sales. Merger and integration costs were $13.1 million higher in the first quarter of 2010 compared to 2009, reducing operating margin by 1.6 percentage points, as integration activities related to Folgers continued. Excluding the impact of merger and integration costs in both years, and further excluding restructuring costs in 2009, operating income increased from 11.4 percent in 2009 to 17.6 percent of net sales in 2010.

Interest and Income Taxes

Interest expense increased $8.2 million during the first quarter of 2010, compared to 2009, as a result of an increase in 2009 in the Company's debt obligations associated with the Folgers transaction, offset slightly by the retirement of $75 million in debt on June 1, 2009.

Income tax expense increased $32.0 million during the first quarter of 2010 compared to 2009. The effective tax rate increased to 35.2 percent in the first quarter of 2010 compared to 33.3 percent in 2009, reflecting the higher effective tax rate associated with the Folgers business and the net favorable resolution of previously open tax positions in 2009 as compared to 2010.

Segment Performance

U.S. Retail Coffee Market

The U.S. retail coffee market segment contributed $366.2 million to net sales in the first quarter of 2010. Compared to the same three-month period last year, prior to the transaction, volume increased approximately 9 percent. The continued expansion of the Dunkin' Donuts brand in the gourmet category and strong growth in traditional roast and ground led to the growth compared to last year.

The U.S. retail coffee market segment added $127.3 million in segment profit for the first quarter of 2010, representing a 34.8 percent segment profit margin. Margins in the coffee segment were above expected long-term levels due to favorable commodity costs and volume related operating efficiencies.

U.S. Retail Consumer Market

U.S. retail consumer market segment net sales for the quarter were up 6 percent compared to the prior year, primarily due to a 7 percent volume gain led by Jif peanut butter, Smucker's fruit spreads, and Hungry Jack pancakes and syrups. Smucker's Uncrustables were down for the quarter.

U.S. retail consumer market profit increased 12 percent for the first quarter of 2010 compared to the same period in 2009, mainly due to sales growth, product mix, and supply chain efficiencies. Segment profit margin for the quarter improved from 21.8 percent of net sales in the first quarter of 2009 to 23.0 percent in 2010.

U.S. Retail Oils and Baking Market

Net sales in the U.S. retail oils and baking market segment were down 2 percent for the first quarter of 2010 compared to 2009, reflecting the impact of higher promotional spending and price declines in shortening, oils, flour, and canned milk. Total volume in the U.S. retail oils and baking market was up 8 percent, with double-digit gains in Crisco oils and Pillsbury flour, baking mixes, and frostings, offsetting declines in canned milk.

U.S. retail oils and baking market profit increased 2 percent for the first quarter of 2010, compared to the same period in 2009. Segment profit margin improved to 14.7 percent of net sales from 14.2 percent in 2009, due to lower commodity costs and supply chain efficiencies, which more than offset substantially higher marketing investments primarily in support of Crisco olive oil and the Pillsbury brand.

Special Markets

Net sales in the first quarter for the special markets segment increased 4 percent. The acquisition of Folgers added $32.9 million to special markets net sales, more than offsetting a 9 percent volume decline and the impact of foreign exchange. Volume declines in foodservice, natural foods, and Canada were generally attributable to the current economic environment.

Special markets segment profit increased 36 percent for the first quarter of 2010 compared to 2009, with the addition of Folgers and lower commodity costs. Profit margin for the quarter improved from 10.8 percent in the first quarter of 2009 to 14.1 percent in 2010.